Why Is the Cost of Government Borrowing Rising Even as RBI Softens Rates?
The Reserve Bank of India (RBI) is slowly moving toward a softer interest rate regime. However, the cost of government borrowing has surprisingly increased. This is evident from the recent auction of the new 10-year Government Security (G-Sec), which showed that yields remain firm despite policy easing.
About the Latest G-Sec Auction
The latest 10-year G-Sec (GS2035) was auctioned at a coupon rate of 6.48%, which is 15 basis points higher than the earlier 10-year benchmark bond (6.33% GS2035). Generally, a new bond is priced a little lower than the existing one, but this time, the spread narrowed to just 3 basis points. This indicates that the market expects limited further rate cuts in the near term.
Why Yields Are Not Falling
Even after the RBI reduced the repo rate by 100 basis points to 5.5% since February 2025, G-Sec yields have not declined significantly. Experts say that investors are cautious because:
- The government may need to borrow more to offset the GST revenue shortfall.
- Higher borrowing increases bond supply, which keeps yields elevated.
- RBI’s recent comments suggest limited space for more rate cuts.
Yield Stabilisation Explained
The yield on the 10-year bond jumped to 6.6% on August 25, but has now stabilised near 6.52%. Analysts view this as a healthy sign of market balance. It shows that while inflation risks are subdued, investors remain conservative until there’s more clarity on government borrowing and fiscal discipline.
Investor Demand and Market Sentiment
At the auction, bids worth ₹1.39 lakh crore were received — slightly higher than the notified ₹1.32 lakh crore. Despite this strong participation, yields held firm, indicating cautious optimism among investors. They prefer to wait for clearer signals on fiscal policy before aggressively marking yields lower.
Many traders interpret this as a sign that the market has already priced in the RBI’s dovish stance. Although the central bank has created room for growth, bond markets remain watchful for any additional borrowing pressures that could push yields higher again.
Market observers tracking short-term sentiment often refer to daily Nifty Tip and BankNifty Tip updates to align their trading outlook with evolving macro conditions.
Implications for the Economy
The weighted average cost of G-Sec borrowings in FY26 (up to September 26) stands at 6.6%, compared with 7% in FY25. While this is an improvement, the pace of decline is slower than expected. The market continues to price cautiously, suggesting that investors anticipate only modest policy moves until December 2025.
Investor Takeaway
Investors should understand that while the RBI is softening interest rates, bond yields remain sticky due to borrowing pressures. This implies:
- ✅ Debt funds and long-duration bonds may remain steady.
- ⚠️ Don’t expect sharp gains from falling rates soon.
- 💡 Conservative positioning continues to dominate bond markets.
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SEBI Disclaimer: The information provided in this post is for informational purposes only and should not be construed as investment advice. Readers must perform their own due diligence and consult a registered investment advisor before making any investment decisions. The views expressed are general in nature and may not suit individual investment objectives or financial situations.
